1. (a) To develop the overall audit plan, the auditor, should evaluate the risks inherent in the Financial Statement level. To develop the audit program, the auditor must relate such evaluation of material account balances and various classes of transactions at the assertion level.
In the mentioned 2 companies, 3 inherent risks that I would have considered are:
i. Weak internal control system: I may have perception that internal controls of the company are good; however in actual the internal controls of the company are not so effective to identify/detect the risk of fraud or miss-happening.
ii. Sample selected for auditing while planning audit may not reflect the true sample of the transactions and this is one of the biggest inherent risk of the company.
iii. Misrepresentation of the financial statements: Financial Statements may be mis-presented or mis-stated; the reason for this may be lack of understanding among the accounting staff or may be due to complexity of transactions.
iv. Auditor, to a limited extent in his disposal in order to minimize the inherent risks, has the following recourse.
(b) Auditor should update his knowledge on latest edition of various topics such as laws, regulations, etc, complete knowledge of the customer's business, thorough understanding of the critical areas. Auditor should exercise proper care in selecting his own staff and selection of their training method. Auditor should design comprehensive audit strategy, planning, program, should be diligent in selecting the outsourcing agency such as professionals.
(c) Three concern areas or comfort areas for each Wesfarmers Ltd. and Virgin Australia Ltd. are:
The first concern entails that the Westfarmers debt is quite substantial which can result in the lack of productivity of their business operations because they would have to pay the cash to lessen their debt obligations. Other than this, their coal sale is also a great concern for them as it is not up to the mark. The third concern could be that within Australia, many companies use different accounting methods. If comparison is made between at least two companies, then this would result in the development of wrong assumptions.
For Virgin Australia Ltd.:
The first concern would include the fact that the investors and managers would rely on the financial ratios and the numbers only. While looking at this, it will not always give the whole picture for the company Virgin Australia Ltd. The second concern could be the differences in the fiscal years. Companies can have the option of utilizing a fiscal year instead of a calendar year for the purpose of accounting. And, if the fiscal year is ending at a different time for two companies during comparison, it would be tough to make an accurate comparison of such businesses. Another concern could be the problem while looking at the financial statements that one may not be getting an exact picture of what the company Virgin Australia would represent. It would be difficult for the company to fit in to any particular classification for the companies.
(d) While selecting the audit procedures the auditor should consider the facts based on the risk of material contain errors. The higher the auditor's assessment of risk, the more reliable and relevant is the audit evidence sought by the auditor of the substantive procedures. This may affect both the types of audit procedures to be performed and their combination. For example, the auditor may confirm the integrity, the terms of a contract with a third party, in addition to the inspection representing the document and obtaining administration.
(e) Independent Audit Report:
i. Audit opinion issued by each auditor is unqualified, as there is no major concern regarding any audit issue.
ii. I agree with the type of audit opinion provided by the auditors as there is true and fair representation of financial statements of the companies.
iii. No there are no such issues after audit report which can strengthen or weaken the opinion.
(f) Corporate Governance Research
i. Yes, both the companies comply with the second edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations released in August 2007 with 2010 amendments (ASX Principles)
ii. Under Operating and financial review section of the annual report you would expect to find information on it
iii. Yes, the companies have an audit committee and it has the correct composition.
iv. Yes, audit committees are of benefit to the auditor, the company, the auditing profession and/or society as a whole as it provides independent view, it provides the direction which is beneficial for both company and society.
2. (a) Over the past 20 years, several researchers have tried to research and define audit quality. However, there is still no consensus on what constitutes quality of the audit or how to measure it. This is due to the quality of audit is based on perceptions and those perceptions depend on whose views are taken into consideration.
Considering how difficult it is to define audit quality, researchers, regulators and practitioners often refer to the quality of the audit by denial, like when it comes to defining independence, as it is "no" quality of the audit.
Audit quality has been of interest to researchers for more than two decades. Much is known about audit quality as a result of that investigation, but there is still much room for future research.
The International Auditing and Assurance Standards Board published a consultation document for public comment in hopes of renewing some dialogue and focus on actions those auditors, regulators and others can take to achieve continuous improvement in the quality of the audit. The IAASB says he wants to present the key elements of audit quality and fostering diverse stakeholders - not just auditors - to do their part to look for ways to improve audit quality (International Auditing and Assurance Standards Board, 2014)
(b) Audit quality is an important issue because of the following reasons:
i. It fulfils your fiduciary responsibility;
ii. It obtains financial assurance related to the integrity of funded programs
iii. It identifies all possible non-compliance issues
iv. It lowers the risk of future non-compliance
v. It builds goodwill among various stakeholders like taxpayers, donors, shareholders, etc
vi. It strengthens the ability to secure funding in the future.
Audit quality is essential for financial markets run smoothly. This paper theoretically examines how auditing standards requiring a minimum level of audit quality affect competitive public company audit market. In our environment, quality audit refers to qualitatively audit better, rather than more audit. Natural examples include independence or
Competency of the audit firm; both examples are numerous rules related to designing the minimum acceptable quality levels. We model an environment in which demand audit quality is strictly driven by customer demand (i.e., there is the auditor's responsibility), top
Audit quality cheaper attracts investors through improved warranties as to the truth of the client financial position; the higher the quality of the audit, the lower the risk of unpleasant surprises. (Dr. Nives Botica Redmayne, 2013)
(c) Yes, the directors and/or the audit committee assist ‘audit quality’, as the insight provided by the directors and the audit committee is important to carry out an audit and if the directors and the audit committee provide right direction then quality of audit will definitely improve. (Australian Securities and Investment Commission, 2014)
(d) The CAANZ (formerly ICAA) in a document titled “The Benefit of Audit: A Guide to Audit Quality” identified five drivers of audit quality, these five drivers are:
1) Input factors, 2) Process factors, 3) Output factors, 4) Key interactions and 5) Contextual factors.
These five drivers have serious impact on the audit quality as these drivers decide the percentage of a quality audit. Based on these factors an audit is carried out and if any of the factors is neglected then the quality of the audit will suffer. Hence these 5 drivers are important for the audit quality.
(e) Yes, literature of the above nature will be of benefit to the auditor, the auditing profession and/or society as a whole as it fulfils the basic purpose of auditing. Auditing is a control to check whether the activities carried out by the company are in the interest of shareholders, society, and other stakeholders or not, and this could be determined only when the auditor maintains the audit quality standards. Hence Audit quality is beneficial for whole society.
Annual Report of Wesfarmers Limited, 2014.
Annual Report of Virgin Australia Limited, 2014.
Virgin Australia, 2013, “Productivity Commission Inquiry Access Regime”.
International Auditing and Assurance Standards Board, 2014, “A framework for Audit Quality: Key Elements that create an environment for Audit Quality”; published by International Federation for Accountants”.
Nives Botica Redmayne, 2013, “Audit Quality – an academic’s perspective”.
Australian Securities and Investment Commission (ASIC), 2014 “Audit Quality- the role of directors and audit committee”.